Lifetime annuity

Guaranteeing you a regular retirement income for life

An annuity allows you to use your pension fund to buy an income from the provider of your choice. The annuity guarantees regular payments until you die. Normally, once purchased, it cannot be altered. There are different types of annuity available in the market, and you should consider the best product to suit your circumstances.

A lifetime annuity is a type of retirement income product that you buy with some or all of your pension pot. It guarantees a regular retirement income for life. Lifetime annuity options and features vary – what is suitable for you will depend on your personal circumstances, your life expectancy and your attitude to risk. You can choose to purchase a lifetime annuity with your drawdown fund at any time.

You can normally choose to take up to 25% (a quarter) of your pension pot – or of the amount you’re allocating to buy an annuity – as a tax-free lump sum. You then use the rest to buy an annuity, which will provide you with a regular income for life. This retirement income is taxed as normal income.

As a rule of thumb, the older you are when you take out an annuity, the higher the income (annuity rate) you’ll get.

There are two types of lifetime annuity to choose from:
• Basic lifetime annuities – where you set your income in advance
• Investment-linked annuities – where your income rises and falls in line with investment performance, but will never fall below a guaranteed minimum

Basic lifetime annuities

Basic lifetime annuities offer a range of income options designed to match different personal circumstances and attitude to risk.

• Choices include one that provides an income for life for you only – a single life
annuity, or one that also provides an income for life for a dependant or other nominated beneficiary after you die, called a ‘joint life annuity’
• Payments to continue to a nominated beneficiary for a set number of years (for example, ten years) from the time the annuity starts in case you die unexpectedly early – called a ‘guarantee period’
• ‘Value protection’ – less commonly used, but designed to pay your nominated beneficiary the value of the pot used to buy the annuity less income already paid out when you die

Your choices affect how much income you can receive. Where you expect to live when you retire might also affect how much income
you get.

If you have a medical condition, are overweight or smoke, you might be able to get a higher income by opting for an ‘enhanced’ or ‘impaired life’ annuity.

Investment-linked annuities

Investment-linked annuities also pay you an income for life, but the amount you receive can fluctuate depending on how well the underlying investments perform. If the investments do well, they offer the chance of a higher income.

It’s important that you are comfortable with the risk that your income could fall if the investments don’t do as well as expected. All investment-linked annuities guarantee a minimum income if the fund’s performance is weak.

With investment-linked annuities, you can also opt for joint or single annuity, guarantee periods, value protection, and higher rates if you have a short life expectancy due to poor health or lifestyle.